Heads of Terms – are they binding?

This was a family dispute relating to farming land. At the mediation heads of terms were signed by the parties. These envisaged the transfer of certain parcels of land, the grant of a tenancy, terms as to payment of a mortgage and an overage agreement. The terms were handwritten and signed by both sides’ solicitors. There was no plan attached although one had been referred to in the negotiations. 

The next morning one of the solicitors emailed the other with ‘3 small points’ which had not been recorded in the heads of terms. There followed correspondence between the solicitors about finalising formal documentation including conveyancing documents and a plan sufficient for Land Registry purposes. Almost two years after the mediation the Defendant changed solicitors and stated that he did not sign or authorise the heads of terms. This was the first suggestion since the mediation that the heads of terms were not binding and resulted in the court case. 

The issue 

Jarman J summarised that ‘The essential issue for me to determine is whether the heads of terms constituted a binding contract between the parties, as the claimants say, or was intended merely to set out some matters agreed in principle as part of a process of arriving at a full and effective compromise, as the defendant says. Alternatively, the defendant says that if the heads of terms did constitute a contract, then such is unenforceable for want of compliance with requirements of section 2 of the Law of Property (Miscellaneous Provisions) Act 1989.’

The points in dispute

Does the fact that further documents were contemplated mean the heads of terms did not amount to a binding contract? 

The heads of terms clearly contemplated further documentation such as transfers and a tenancy, but the judge held that it, on the face of it, did not contemplate a further formal agreement. He held that ‘.. the mere fact that a more formal document is envisaged does not of itself preclude the existence of a binding agreement’. 

It was not an indication that the heads of terms were not intended to be binding but was to attempt to agree the manner in which the heads of terms would ‘go through’.

Was there an intention to create legal relations? 

Jarman J held that, given that the whole point of the mediation was to resolve the dispute, and that a written agreement was signed on behalf of the parties, as required by the mediation agreement for there to be a binding resolution, then if the heads of term were sufficiently certain it was difficult to see how it could be said that the parties did not intend to enter into a legal relationship and in his view they did so intend. 

Were the heads of terms certain enough for a binding agreement?

There were several aspects to this.

Was it agreed what land would be transferred to the defendant? 

The most substantial issue of fact was whether there was a common understanding of the land to be transferred under the heads of terms. No plan was attached but during negotiations a plan had been used with a pencil mark showing the division.  This plan had subsequently been lost. Relying on oral evidence the judge held that, despite there being no conclusive plan, it was likely that at the time of the mediation the defendant did understand what was being transferred to him. 

Certainty of other terms

There were issues as to whether it was certain when the tenancy would start and who would be the tenant and also as to the terms of an option and overage provisions. On the facts the judge had no problem in deciding that these were all sufficiently certain.  Whilst he thought that the mechanics of the option were not set out in the heads of terms these amounted again simply to the manner in which the ‘option agreed will go through. The essentials were set out in the heads of terms.’

Did the agreement comply with section 2 of the Law of Property (Miscellaneous Provisions) Act 1989? 

Section 2 provides that a contract for sale or other disposition of an interest in land can only be made in writing and only by incorporating all the terms which the parties have agreed in one document. The defendant referred to the three minor matters raised by his solicitors after the mediation. The issue was whether these points had been agreed at the mediation or were afterthoughts that it was sensible to include in the formal documentation. The judge relied on the ‘strong impression given in the contemporaneous emails that there was no express agreement on these points on the day of the mediation but consensus thereafter that it would be sensible to include them or some of them’. Therefore, all terms agreed at the mediation were incorporated in the heads of terms, which thus complied with the statutory requirements. 

Conclusion 

Even though the parties envisaged further legal documents needed to be drawn up the heads of terms themselves were held to be binding. In future parties will need to think carefully about whether they intend ‘heads of terms’ to be binding or not. If not it may be wise to formally record that in the document and mark it ‘subject to contract’. 

Jacqui Joyce, full-time mediator at The Property Mediators